CPS Technologies Corp. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 26, 2020 (52 weeks); comparisons are with the 52 weeks ended December 28, 2019. CPS designs and manufactures custom metal-matrix composite components and related assemblies for electronics, transportation, energy, aerospace and defense applications.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $20.9 million | $21.5 million |
| Gross profit / margin | $4.17 million / 20% | $2.54 million / 12% |
| Operating income (loss) | $0.91 million | ($0.60 million) |
| Net income (loss) | $0.91 million; $0.07 per diluted share | ($0.64 million); ($0.05) per diluted share |
| Operating cash flow | $1.67 million | ($1.26 million) |
- Revenue declined 3%. Management attributed the decrease mainly to reduced purchases by the largest customer amid COVID-19 effects on rail ridership.
- Gross margin improved principally because price increases were fully in effect during 2020; operating efficiencies also contributed to the improvement in operating results.
- Capital spending was $0.32 million. Cash and cash equivalents were $0.20 million at year-end, versus $0.13 million a year earlier. Accounts receivable fell to $2.91 million from $4.09 million, while inventory increased to $3.71 million from $3.10 million.
- Current assets were $6.89 million and current liabilities $1.81 million. The $3.0 million revolving credit facility had no year-end borrowings; the borrowing base permitted about $2.2 million of availability. Notes payable totaled about $0.21 million, including current and long-term portions.
- Net cash increased by $0.06 million during the year. Operating cash flow funded operations, capital spending and debt repayments.
Fourth-quarter performance and material changes
- Q4 revenue was $4.2 million, down 24% from $5.4 million in Q4 2019, primarily due to lower baseplate sales to the two largest customers.
- Q4 gross profit decreased to $0.5 million from $1.0 million. CPS reported a $0.3 million operating loss and a $0.2 million net loss, compared with operating income and net income of $0.4 million in Q4 2019. Equipment-sale proceeds related to the Attleboro facility closure reduced the operating loss.
- Customer concentration remained high: the three largest customers contributed 73% of FY2020 revenue, versus 70% in 2019. The largest alone accounted for 36%; the top three also represented 70% of year-end receivables.
- Inventory turnover declined to 4.5 times from 6.2 times in 2019. Management said inventory had been built for expected demand before major customers reduced forecasts; it expected elevated inventory to take another quarter or two to normalize.
- CPS closed its Attleboro facility at year-end and consolidated operations in Norton. The Norton lease was extended through February 2026; annual rent was reported at $152,000.
Outlook, risks and other notable items
- Management expected to fund 2021 operations from cash balances, the credit facility and profits, while warning that customer demand volatility could continue for several quarters. The filing provides no quantified revenue or earnings guidance.
- Management cited customer concentration and the risk that loss of a major customer or vendor, inadequate revenue, or inability to obtain financing could adversely affect operations. COVID-19-related demand reductions and customer-specific inventory are prominent near-term concerns.
- The revolving facility is secured by receivables and other assets, bears interest at LIBOR plus 6.5%, and includes a demand note that permits the lender to call the loan. The lender waived compliance with 2020 covenants, including the Q4 earnings requirement.
- The company reported no material litigation or off-balance-sheet arrangements. Its independent auditor issued an unqualified opinion on the financial statements and reported no critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective; the smaller-reporting-company filing did not include an auditor attestation on internal controls.
Key facts for investors to verify
- Whether demand from the largest customers recovered after the Q4 2020 reductions, and whether customer concentration changed.
- Whether customer-specific inventory normalized without write-offs, given higher inventory and lower turnover.
- Actual 2021 operating cash generation, profitability and borrowing availability, including the effect of the lender’s demand right and covenant terms.
- Whether price increases and improved gross margin were sustainable despite lower sales volumes and customer volatility.
- The recoverability of deferred tax assets: CPS maintained a substantial valuation allowance and disclosed that approximately $15 million of taxable income and reversals of temporary differences would be needed to fully use the deferred tax asset.